Thursday, December 24, 2009

Please accept with no obligation, implied or explicit, my best wishes for an environmentally conscious, socially responsible, low-stress, non-addictive, gender-neutral celebration of the winter solstice holiday, practiced within the most enjoyable traditions of the religious persuasion of your choice, or secular practices of your choice, with respect for the religious/secular persuasion and/or traditions of others, or their choice not to practice religious or secular traditions at all. I also wish you a fiscally successful, personally fulfilling and medically uncomplicated recognition of the onset of the generally accepted calendar year 2010, but not without due respect for the calendars of choice of other cultures whose contributions to society have helped make America great. Not to imply that America is necessarily greater than any other country nor the only America in the Western Hemisphere. Also, this wish is made without regard to the race, creed, color, age, physical ability, religious faith or sexual preference of the wishee.

Friday, October 16, 2009

This post will help novices understand why twitter, blogging, and related social media are more than a fad, and you don’t have to be Tarzan to control your jungle.

If you were born before 1974, you may be thinking that the facebook, blogging and twitter phenomena is a passing fad. Think again. Think today. The amazing publication power from blogs, twitter and social media is changing the way we do business. And it should.

How does it work? Its like the jungle. There is more than one Tarzan calling all the elephants to come save his rear however. Flocks of birds may have more to tell us about how this will all work ultimately, but in the interim it is as simple as that. If you are a bird you call and listen all day long about basically the same stuff humans worry about. Where is the best place to eat? Is that place safe or dangerous? Can I meet someone special there? When are we taking off for winter? etc. etc.

The business ramifications for this advent in human behavior are enormous. Think about it. You have a brilliant idea but you have no connections to the people who can use it and would likely pay you handsomely for it. In the past you would search and perhaps never find a connection that could help you. Today you google Blog sites for people that have those interests. You try to add value to them so say they might pay attention to you.

You reach out to that blogger and he agrees with your good idea. And he makes a post about it. He also sends out a message on Twitter (a “Tweet”). Now he is your Tarzan! He has 1,000,000 followers because he is an expert in his field (or he is really popular for other reasons). In any event, your idea just got posted and within a few days 1,000,000 people heard about it. For Free! That kind of marketing would be unaffordable in the past. Better yet, 1% of his followers agreed with him and “re-tweeted” the post, and those 10,000 folks are connected to another million people who also like your idea. This is a whole new level of leapfrog - Its like lightspeed leapfrog(TM)!

How do you reach out to bloggers? Having a blog is a good start. Birds of a feather flock together - Bloggers have a pecking order, they have protocols, quid pro quo’s, and much of it is driven off the value add of what they read. If its drivel its going nowhere fast. So think hard about what you think is valuable and does it add value to others. A core component in any business relationship.

Exponential compounding of relationships is what this is all about. It still is who you know more than what you know, and blogging and twittering is the new connecting force of the human flock. I’m told by MyNetWatchman.com Hackers can hit every single computer in the world in a matter of minutes. Your ability to connect to your future is just a Tarzan tweet away. Who knows, maybe you can be your own Tarzan?

Thursday, October 15, 2009

OMG, the Titanic sank. (See Link to 2004 article Its About Time) Roughly a year ago, thousands of people killed for simple pilot error – no wonder Captains go down with the ship. Some Hedge fund managers would say that is an easier fate than what they face now in terms of high water marks, new regulations, and horrible investor relations. Few people cared five years ago when the alarms were set off, and now that the boat has sank, even fewer care to go back and see who was at fault. In fact, our federal government has chosen to put the very people responsible for the system break-down in charge of the repairs. The stampede for the market’s exit nearly killed the herd. The quantifiable logic that market forces are outside quantifiable boundaries is now plain to see, and no one seems to know what to do. Many lead steers are dead, others penned for slaughter by the Cowboys at the gate. Still others in limbo, watching the herd to determine where their best relative position will be.

The system that created unimaginable wealth is somehow unimaginably gone. Or is it? The basics of life are still produced and available at the supermarket. The electronic means of moving value p.k.a. Cash, is still in tact. As long as you don’t have to use a wheel barrow to carry your bank notes, no one can tell the currency is debased. The issue at hand is connecting the American dream with American reality. The bridge between dream and reality is and always has been the indefatigable American spirit; the ingenuity, the innovation, the entrepreneurial DNA that we inherited from our fore-fathers, who had the gumption to leave the status-quo and opt for self-reliance in the world of the unknown. The equivalent of enormous natural resources available to our fore-fathers is today’s networks and distribution systems of products and information. 40 acres and a mule is now 40 gigabytes and a stool. America will plow forward despite the lack of automatic liquidity from financial markets.

The current reality requires we deal with many significant market imbalances.

Consider the trillion dollar plus imbalances:

1) Supply and Demand for residential real estate (inning 6?)

2) Supply and Demand for commercial real estate (inning 1)

3) Supply and demand for corporate credit facilities (inning 7)

4) Government expenditure and revenue (inning 3)

Consider the $100 billion dollar plus imbalances:

American Automotive manufacturing capacity and demand

City and State government expenditure and revenue

AIG Portfolio assets and liabilities

Major Banks and Insurance company assets and liabilities – Goldman, Morgan, BOA, Merrill,

Foreign governments expenditure and revenue

These imbalances will take years to level out. If real estate pricing follows the example of the 20th century, land prices paid in the 20’s were not seen again until the 1950’s. For reasons beyond explanation, today’s lenders believe they are better off to foreclose than make loan modifications that will enable productive use of the assets involved. It is tantamount to the debtor’s prison of centuries past when if a man could not pay his debts he would be locked in jail where he could never pay his debts and his family was left completely dependent on society for their support. Lenders will likely sell these properties for far less than the current debtors-in-possession would be willing to pay, expanding the imbalance of supply and demand. My sources indicate that current foreclosure recoveries are roughly 25% of mortgage balances. The truth hurts doesn’t it?

The financial market Tsunami of 2008 resulted from the issues we pointed out in January of 2004 in our pre-blogosphere article “Its about time”. The implosion of the markets resulted from significant irrational pricing of risk. The resulting wave has hit us, and now we are dealing with the ebb tide that is ripping every industry off its moorings. Successfully navigating the ebb tide will require a combination of innovation and careful risk management – not risk avoidance, but management.

What then is an investor to do? Faced with insurmountable declines in all leveraged asset prices, extremely low yields on risk free assets, and doubtful veracity in many financial instruments, is it any wonder so many are holding on to their cash? Is there any asset class that can generate positive returns with any probability?

The short term “wave action” will require steady hands at the helm and active investment management is clearly the favorable style. Serious due diligence combined with sensitive analysis of cash flows and growth opportunities will result in solid investment returns for the informed investor over the next several years. Embracing the notion of 40 gigabytes and a stool will be hard for many, but the future of capital growth is in identifying the beneficiaries of the network age and plying them with capital. The future is about information and its abundance not about legacy businesses of construction, manufacturing, and print media.

5 years ago there was literally no access to the leaders of the venture capital industry, titans who spawned Amazon, Google, and a host of other household names. Today these investment managers are readily available through secondary purchases of their funds from many of the largest portfolios in the world. New capital is generally unavailable for any team desiring to fund innovations and work with entrepreneurs. The hottest investment market is healthcare, where revenues are peaking and profitability is suspect. High returns have always resulted from where investment dollars are least likely to go. Our recommendations in 2004 provided significant returns through the Tsunami of 2008 - proxy graphs are included at the end of the article.

The havoc wreaked in the last year stems from misguided loyalty to pure capitalism, NOT capitalism with moral restraint. It is interesting to note that leading corporations are finding that by aligning their brands with socially important (and popular) causes actually improves employee productivity. The moral values of brands are actually a differentiating factor hence the popularity of being green and sustainable. The rise of Social Capitalism as an industry is remarkable and I think here to stay. As the world discovers Google Chairman Eric Schmidt is correct that “the right way to run human systems is transparency,” invalid and conflicted value propositions will diminish, and our global citizens will be better off. Just a little late, but isn't that human nature?

In the meantime investors need to “pay attention to the tension” and carefully consider the incredible spread of potential outcomes we face. Owning secure knowable cash flows needs to be a priority for every portfolio and balance it with thoughtful research and investment in innovation based businesses. I expect in 2014 you will be very glad you did.

Tuesday, October 13, 2009

The TED Conferences that started in 1984 in California have gone global and digital in a major way. For those of you unaware of TED, I encourage you to check out www.ted.com. These “annual conferences in Long Beach and Oxford bring together the world's most fascinating thinkers and doers, who are challenged to give the talk of their lives (in 18 minutes).”

The TED organization is big, but what’s bigger is their following. TED stands for Technology, Entertainment, and Design. Its mission of showcasing “Ideas Worth Spreading” resonates across the globe. In the last year or so they have started to promote shorter local conferences and the response is amazing. These conferences called TEDx “local name” are springing up all over the world and most notably are non-profit, non-commercial events.

I am participating with a group to host a conference in Atlanta called TEDx Peachtree. You can learn all about it at www.tedxpeachtree.com. It takes place December 4 and will be held at SCAD, who has generously offered their event space for the day. The attendance is limited and tickets are available through an application process on the TEDx Peachtree website.

Monday, September 28, 2009

I have had the pleasure of advising a few investors of great significance financially in my life and I told them we would stand on top of our desk and yell if we thought they were making the wrong move. To be honest, I didn’t actually stand on top of my desk and yell, but I did say “I am standing on top of my desk and it’s time to sell” when the market peaked in 2000. The investors were unmoved, comfortable with the status quo in volatility and likely uncomfortable with the taxation they would bear when selling. The rest is history, advice spurned turned into money burned.

But investing is personal and what right do I have to deny them the comfort of their own persuasions? Thus, great investing and their results are a function of debate and a wrestling with facts and myths, perspective and context, history and human behavior. This is why it is important to start with philosophy and policy, our personal, unique astrological-type chart for navigating the investment ocean.

I am struck how little attention is paid to the contrarian view. It is hard to define a top or a bottom price in any asset class, but it is fairly simple to define where money is not available. This provides a starting point for research and the development of investment targets. The next step is to define sustainability of the target. Is it too early to invest? Is it too late? Does the investment provide a reasonable reward for the risk?

One area that is devoid of capital at this time is the Venture industry. The resistance by investors to consider even the most conservative opportunities is striking and will definitely result in well rewarded returns for the shrewd investor. Five years ago the toughest investment to source was exceptional venture investment funds - today you can have your pick.

The most popular investment today is liquidity, leveraged within a leading financial institution. Five years from today, I suggest the most popular investment will be private or semi-private growth companies.

Make sure you spend more time looking out your windshield instead of the rear view mirror - it’s much bigger, and it makes the drive a lot easier!

Sunday, September 20, 2009

Investing is personal—and don’t ever forget it. However scientific your approach to evaluating risk and return, the ultimate decision is a personal one and the results of your investment will have a great deal to do with how well you know yourself. Here are five common personal mistakes to avoid in investing:

Popularity: If an investment idea is popular, it is only natural to want to be a part of it. If it is truly popular, you can be pretty sure it’s overpriced. Market tops are always defined by what is the most popular investment. Think Real Estate in 2007, think internet stocks in 1999. One of my favorite indicators for measuring the most popular industry (and thus a place not to invest) is the most popular job for newly minted MBAs. In 2006 it was Private Equity, in 1999 it was Venture Capital, and so on. It is part of human nature to align with what is popular, and so many of our investment mistakes stem from that

Horizon and Liability Mismatch: John Maynard Keynes said it best: “In the long run, we are all dead.” So many people will say they are in for the long run but they really are not. They are in for the long run as long as the values don’t go down too much, or until they have something else they would rather spend their money on. It is essential to match your horizon to the predictability of the environment you face. Fund your liabilities within that horizon. You may outlive your assets if you expect too much from them. It works both ways—it is easy to be too liquid or too illiquid, and managing the balance is a PERSONAL choice.

Momentum (Greater Fool Theory): People always expect that someone else will always be there to buy what they are holding, thus the crash of 2008 could never happen. Or worse, they expect there will always be debt capacity to carry the investment. 2008 happened, and it happened for all of the reasons mentioned in this post.

Rich means Smart: The New Yorker had a great editorial years ago: “If you’re so smart, why aren’t you rich?” Rich does not mean smart nor does smart mean rich. Some of the greatest success stories of all time die broke—and how many wealthy college professors do you know? Many people like to invest in deals where Mr. Big is leading the charge: ”If he has his money in the deal, it must be good.” Nothing could be further from the truth. Often Mr. Big does have good investments, but his risk profile and appetite may be entirely different than yours and if so, it may cost you dearly.

Strategy Stew:Averaging Down - how to take a failed fundamental strategy and turn it into a technical “bounce” strategy.Missing the Boat - diving into a deal without enough due diligence to justify the investment because you are afraid you will miss out on “the deal of a lifetime.” Also calls out a potential horizon/liability mismatch.High Risk = High Reward - not really, if an investment is very well thought out, the reward comes from recognizing there is much lower risk than the popular uninformed view, which should mean ultra smart low risk = high reward.

Tuesday, September 15, 2009

These quotes come from the (out of print) book, The Merchant Bankers by Joseph Wechsberg. Fortunately for me I had just read this book when I received the most important interview question of my entire life: “Chris, what would you do with a hundred million dollars?” My response was: “...that is a phenomenal question and speaks directly to my investment philosophy. Why don’t I write that down for you and we can discuss it?” The answer was apparently acceptable because I got the job and my philosophy was soon part of the organization’s policy book. Here are the quotes - they speak for themselves - keep in mind most of these rules have been around for hundreds of years!

“One can’t avoid being wrong once in a while, the important thing is not to be wrong too often.” Jocelyn Hambro (1700s).

“The banker’s three cardinal qualities: First to be able to put oneself in the situation of the customer, second, courage as one approaches a task, and third, caution to know the extent of the risk.” Hermann Abs (1700s).

“Between success and failure there is a margin no wider than a razor’s edge.” Mattioli (1700s).

“Without complete integrity, there can never be complete confidence.” Rothchild (1700s).

“You can do all the business in the world, if you do it for nothing.” Barings (1800s).

Tuesday, September 8, 2009

If you are so lucky to not have made some bad judgments along your path, look twice as you move forward. My best senior mentors always told me to look behind the good news—meaning there may be more luck in that success than a solid basis of good judgment and execution. I would add though that people change. They grow and get better at what they do. So many people make a negative judgment about a person or an investment opportunity or an industry and that perspective stays with them. They miss the fact that change is continuous and most people improve with age. I have to admit I passed on David Einhorn when he was 27 and forming green light capital. It wasn’t that he wasn’t smart; it just seemed he was too young and too inexperienced to invest in at the time. Oops. He now has a six billion dollar fund and likely doesn’t remember our conversation.

Thursday, September 3, 2009

Going back to the mid ‘90s when I was responsible for a significant 9-digit private fund, I gathered up many of my favorite investment managers and had them to lunch at Bones, my favorite restaurant here in Atlanta. It occurred on the first Thursday of the month and so it became the “First Thursday” group. The lunches served multiple purposes, but primarily gave me the benefit of a few hundred more years of investment experience and insight every month. It also helped the managers attending get feedback on their ideas as well as to better define key inflection points in the markets. For years we only had buy side attendees, but after a while we invited one institutional sales guy from Merrill Lynch. He is probably the best-read person I have ever known, and I have become quite dependent on his “Cliff’s Notes” over the years.

We don’t have minutes, but in the last few years I have been making notes about what we like and don’t like and it is uncanny how savvy this group has been. I guess that is why we still meet. Many of the managers have retired, but still have their own accounts and like to have a regular forum to check in and talk about the markets and hear the occasional investment pitch.

Now that I am formalizing my investment thinking in this open forum I will be mentioning each month the highlights of First Thursday meetings. I hope you will find it as helpful as I have.

Monday, August 31, 2009

One of the most common mistakes investors make is living in the past. It is essential to think today, not yesterday and not tomorrow. This is not to say we don’t utilize information from yesterday and make forecasts about tomorrow, but more to point to the internal biases we develop and maintain that interfere with rational evaluation of the current situation, e.g. I can’t sell that stock, it’s has too large a gain, it belonged to my father, it was the company that made our fortune, it’s a part of the family, it’s gone down so much surely it will bounce back, it’s blue chip it must be safe, and so on.

In the meltdown of 2008, a host of wealthy investors lost fortunes in bank stocks. Many of them were holding shares that had resulted from mergers which completely changed the operating metrics of the original holding company. The industry had changed, the management had changed, the risk of the business had changed but the names were not changed, just everything relevant to the value of the business. So why did so many people hold onto these time bombs? I suspect it was not because they were “thinking today”.

Issues of leverage and asset concentration were a major contributor to bank stocks demise. The departure from traditional banking practices and entry into derivatives and other extremely complex securities compounded those issues. What people remembered or thought they owned was in fact not at all what they owned—they weren’t thinking today, but thinking yesterday.

Thinking today does not mean adopting a trading mentality but rather recognizing the moment, the situation you are in, and its context. The people who hold concentrated positions are making a decision of great importance whether or not they choose to think about it today. Holders of concentrated positions are making a probability assessment of market value. They also usually underestimate the consequences of their assessment. In Atlanta I know the failure or near failure of two different companies cost our community well over a billion dollars in market value. The true consequences of the losses are still vastly misunderstood—both by the losers and their observers. Those that do understand are mad as hornets about the recent admissions by Hank Paulsen—but that’s a blog for another day.

Tuesday, August 25, 2009

The dilemma we face as taxable investors has big horns: if we hold on to our appreciated assets long enough we can die with them and create a new cost basis for our heirs, bypassing capital gains taxes. This horn leads investors to hold on to companies earning subpar returns holding out for the hope “good times” will return and justify the hold by avoiding tax erosion. Should we sell, pay taxes and then redeploy in an asset that does not meet our objectives we are stuck again and with 20 to 30 percent less? This issue drove many investors to invest in absolute return strategies aiming for minimal volatility and 1% monthly returns (which rapidly became 0.50% monthly returns). Taxes are maximized but downside seemed minimal which is more important - sort of like the devil you know is better than the one you don’t.

That didn’t work well either, as of last year investors that capitulated with this strategy in the last 24 months lost 50 to 80 percent of their capital and likely are hung with non-performing investments in long term lock-ups.

So what does a shrewd investor do? Structuring your holdings in partnerships can provide a great solution. Following estate planners’ main theme “live well and die poor,” developing investment partnerships between different family generations can allow for holdings to be managed for maximum tax efficiency and ultimately better returns.

Don’t allow tax consequences to drive your investment decision process, but it's OK for them to sit in the front seat with the business merits driving the deal.

Friday, August 14, 2009

...it takes too long to heal the broken, if the door is locked kick it open.

Jeanette Sears wrote the words and her husband Pete Sears wrote the music for this fabulous song recorded by Moonalice. Pete is an amazing keyboard artist and all around musician and I applaud their musical philosophy. If you are my age you likely remember less and less, but you should remember in high school how the songs of the day seemed to reflect exactly how you felt about that crush or that sporting event or about that connection you had. I had a friend in high school who must have ended up as a DJ, he had written a love letter to some girl that incorporated the first line of nearly every top 40 song of that year 1974. I was blown away at the creative connections he made between popular music and real life.

The Sears’ call to kick down the door to heal the broken is incredibly relevant today. We have experienced a giant move to the left as a country, and yet the left is as incapable as the right at developing rapid fixes for the less fortunate. It is time to kick open the locked doors of entrenched bureaucracy, whether its corporate America, the Sierra Club, Congress, the public education system, etc. and speed up the process of mending America. The 1960’s were full of protests about the Establishment and yet today the Establishment is as pervasive as ever - its not necessarily a WASP-oriented press and government, its an organizational culture that seeks to protect itself no matter what, to maintain the status quo while all the time paying lip service to continuous quality improvement and other unmeasurable management techniques. The music and freedom of the 60’s did a lot for the reinvention of our culture, our business models, and most of all our leadership position in the free world. It's time to rethink how open we are to a change of mind, and a better direction. It's time to kick it open. Let's get efficient, let's get green, let's get America going again.

Mike Aronstein is one of our nation’s greatest thinkers and he makes some great comments in his Marketfield quarterly report about the current government legislative surge: “the legislation that emerges from today’s congressional retrospective will be completely irrelevant in influencing the next cycle of excess and may, in fact, contribute to its development. Proper incentives rather than regulation are the only way to shape behavior. If the directors and officers of all insured depositary institutions were personally liable for any loss to depositors or the FDIC, attitudes toward risk would change overnight.”

Edmund Burke had a Kick It Open statement a mere 300 years ago: “All that is necessary for the forces of evil to reign in this world, is for enough good men (and women) to do nothing.” What do you need to do to Kick it open?

Saturday, August 8, 2009

I expect many of us will continue along a bit like ostriches, not knowing what they are missing - not necessarily scared, just don't want to be bothered by this new aggressive intruder I call the digital dimension of our life. I am embracing it finally: the advent of HD, the six- hour laptop battery, and network television's inability to compete are all noted contributors to my own metamorphosis.

Thursday, August 6, 2009

For those of you who haven't read The Tipping Point by Malcolm Gladwell yet, you should (at least the first half). It's a really useful summary of why our communities behave the way they do. Gladwell defines types of people, and per his book, I am a connector. Right now I'm connecting you and me, and if you stay in touch I will connect you to some unusual and helpful perspectives on life and how to get what you want, be it business or personal. I will connect a lot of data points and help you connect your future to your present.

I'm also a story teller. I will make analogies I hope will inspire a grin as well as a new perspective. One of my favorite movie lines comes from Kung Fu Panda: “Yesterday is history, tomorrow is a mystery, today is a gift, which is why it’s called the present.” Connecting your future to your present is an exciting process, made more possible than ever before because of the digital dimension. This bridge connecting present and future is strategy. Hopefully my sharing a perspective from this perch in our digital world will be my third thing I try to be: helpful.

Wednesday, August 5, 2009

This is about me and it's about you. It's about me and you and it's about a new aspect of our lives which has grown so powerful we can hardly comprehend it. Welcome to the digital dimension, where there are no waiting lines, no shortages, and no lack of anything but time to absorb what we can. It's changing everything. The formula for life success used to be 10% inspiration and 90% perspiration, and now its about 10% perspiration, 45% inspiration, and 45% IPhone or PRE Apps (which are 90% inspiration and 10% perspiration), so the net net is life success in the digital age is largely about inspiration.

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This is about me and it's about you. It's about me and you and it's about a new aspect of our lives which has grown so powerful we can hardly comprehend it. Welcome to the digital dimension, where there are no waiting lines, no shortages, and no lack of anything but time to absorb what we can.